Chanel seizes rogue websites' domain names

For years, IP owners have complained about online infringement. But Chanel Inc. is doing something about it—something that other IP owners may want to emulate.

The luxury goods maker has brought an in rem action (against a property rather than a person) against more than 1,000 websites that allegedly sell counterfeit Chanel products, and has quickly obtained the court’s permission to seize the websites’ domain names.

This is a significant departure from the legal tactics typically employed against online infringement. IP owners ordinarily file in personam infringement suits against the owners of websites that engage in infringing activities. The plaintiffs seek large damage awards and injunctions against future infringement.

Such suits, however, haven’t sufficed to stem the flood of websites selling counterfeit versions of trademarked goods or unlawfully distributing copyrighted songs, movies and TV shows. One reason is that many of these websites, which some label as “rogue websites,” operate outside the U.S., often in nations with scant enforcement of IP rights.

Chanel’s approach sidesteps that limit on U.S. authority by seizing domain names that may be registered with U.S.-based registrars or registries.

But this tactic is controversial. Many legal experts doubt that the courts have the authority to order these seizures of domain names. However, even those skeptics admit that Chanel’s legal strategy has been quite successful—and is likely to remain so.

Taken Down

U.S. courts have repeatedly ordered the seizure of domain names from infringing websites. “This relief has been issued in a multitude of cases because the courts recognize that it is the only effective means of stopping an online counterfeiter,” says Stephen Gaffigan, who is Chanel’s lead litigator in this matter.

But the vast majority of these cases are of dubious precedential value, according to Prof. Jessica Litman of University of Michigan Law School, because they are “orders and default judgments in other uncontested cases.” The courts in such cases have not seriously examined the legality of seizing domain names. “If you bring proceedings that won’t be contested, the courts will give you what you ask for,” notes Prof. Eric Goldman of Santa Clara University School of Law.

Two contested cases, however, uphold the legality of seizing domain names in order to stop online infringement, according to Gaffigan.

In Chanel, Inc. v. Bosini, a defendant accused of trademark infringement moved to strike from the complaint one of Chanel’s requested remedies: the seizure of the defendant’s domain names. The defendant argued this was not a lawful remedy for infringement.

In January 2010, a magistrate judge for the federal district court in the Northern District of California denied the defendant’s motion, holding that the defendant had failed to prove the seizure of domain names could never be a proper remedy for trademark infringement. The judge suggested the remedy might be available under certain circumstances, but did not explain further.

Equitable Power

The holding in Philip Morris USA, Inc. v. Otamedia Ltd. did go further. The defendant in that case, Otamedia, operated a website that sold, among other items, Philip Morris cigarettes. Philip Morris intended those cigarettes to be sold outside the U.S., but Otamedia sold many of them to U.S. customers.

Philip Morris sued for trademark infringement and obtained a default judgment in January 2003. A federal district court judge in the Southern District of New York enjoined Otamedia from selling any more “gray market” Philip Morris cigarettes in the U.S.

Otamedia, a foreign company, ignored the injunction. So in August 2004, Philip Morris asked the court to add a new remedy to the default judgment: an order transferring Otamedia’s domain names to Philip Morris.

Otamedia appeared in court to oppose this remedy. The company argued that this relief would be unduly broad and inappropriate—preventing the company from making other entirely lawful sales and driving Otamedia out of business.

The court held that it had the equitable power to order the seizure of Otamedia’s domain names. But it stated that if the infringing gray market items accounted for “only a small fraction of Otamedia’s sales,” seizing the domain names “would arguably be inequitable—a form of relief to be ordered, if at all, only after the exhaustion of less severe remedies.”

The court determined that the infringing sales constituted “a large proportion, if not the mainstay,” of Otamedia’s business. Because of that, and because Otamedia overtly refused to declare that it would abide in the future with the injunction against gray market sales, the court ordered the domain names to be transferred to Philip Morris.

Going Unchallenged

The 2004 Philip Morris decision indicates that U.S. courts can seize the domain names of websites whose activities violate trademark rights. But it also indicates this remedy should only be used if less drastic remedies (such as an injunction) do not work—and if the infringing sales constitute a significant percentage of the website’s sales.

This latter limit does not appear to be satisfied in Chanel’s mass in rem suit. The court’s orders fail to mention whether the infringing sales of Chanel products constitute a significant percentage of the various websites’ sales.

But so long as no one challenges Chanel’s actions in court, the company can continue to get default judgments that seize domain names.

Website owners are unlikely to challenge Chanel in court for various reasons: Some owners know they are guilty of infringement. Some overseas owners can’t afford to litigate in a distant U.S. court. Some owners won’t bother litigating because it would be faster, easier and cheaper just to get new domain names.

Judges are unlikely to challenge Chanel’s legal tactic. They often give little oversight of default judgments.

Registrars, the entities that sell and manage domain names, are unlikely to bring any legal challenges, even when they are ordered to transfer the domain names of allegedly infringing websites to a different registrar. That’s because registrars make only a little money from each domain name. “Even if the registrar has to hand over 200 domain names ... it is a trivial amount of money. It is not worth fighting over,” says Goldman.

Thus, the domain seizures seem likely to continue. “I don’t think that the Lanham Act authorizes the orders entered in this case, but so long as nobody contests the motions, [Chanel] appears to be on a roll,” says Litman.